Friday, August 18, 2006

Value in Ricardo

In his Principles, Ricardo distinguishes between "market prices" and "natural prices", a distinction he takes from Adam Smith and Smith's predecessors. Market prices are the prices that prevail at any given time on the market. According to classical economists, they include transient and random variations. Natural prices act as centers of gravitational attraction for market prices. At any time, market prices are tending towards natural prices, in some sense. But does the mature Ricardo distinguish, as Karl Marx later does, between natural prices and value, where value is the quantity of labor embodied in a commodity when outputs are at levels consistent with natural prices? (Smith refers to this level as the level of "effectual demand".)

This is an area where Ricardo is notoriously difficult to understand. Consider, however, this passage from towards the end of the first chapter of the third edition of Ricardo's Principles, that is, after Ricardo has explained that natural prices will generally not be proportional to labor values:

"It is not by the absolute quantity of produce obtained by either class, that we can correctly judge of the rate of profit, rent, and wages, but by the quantity of labour required to obtain that produce. By improvements in machinery and agriculture, the whole produce may be doubled; but if wages, rent, and profit be also doubled, these three will bear the same proportions to one another as before, and neither could be said to have relatively varied. But if wages partook not of the whole of this increase; if they, instead of being doubled, were only increased one-half; if rent, instead of being doubled, were only increased three-fourths, and the remaining increase went to profit, it would, I apprehend, be correct for me to say, that rent and wages had fallen while profits had risen; for if we had an invariable standard by which to measure the value of this produce, we should find that a less value had fallen to the class of labourers and landlords, and a greater to the class of capitalists, than had been given before. We might find, for example, that though the absolute quantity of commodities had been doubled, they were the produce of precisely the former quantity of labour. Of every hundred hats, coats, and quarters of corn produced, if

The labourers had before . . . . 25

The landlords . . . . . . . . 25

And the capitalists . . . . . . 50

...And if, after these commodities were double the quantity, of every 100

The labourers had only . . . . . 22

The landlords . . . . . . . . 22

And the capitalists . . . . . . 56

In that case I should say, that wages and rent had fallen and profits risen; though, in consequence of the abundance of commodities, the quantity paid to the labourer and landlord would have increased in the proportion of 25 to 44. Wages are to be estimated by their real value, viz. by the quantity of labour and capital employed in producing them, and not by their nominal value either in coats, hats, money, or corn. Under the circumstances I have just supposed, commodities would have fallen to half their former value, and if money had not varied, to half their former price also. If then in this medium, which had not varied in value, the wages of the labourer should be found to have fallen, it will not the less be a real fall, because they might furnish him with a greater quantity of cheap commodities than his former wages." (Ricardo 1821)

Furthermore, Sraffa had the good fortune to discover a paper that Ricardo had been working on in the last month of his life, the manuscript "Absolute Value and Exchangable Value". Sraffa has this to say about that manuscript:

"Yet this paper has importance since it develops an idea which existed previously in Ricardo's writings only in occasional hints and allusions: namely, the notion of a real or absolute value underlying and contrasted with exchangeable or relative value." (Sraffa 1951)

Thus, there is textual evidence that, in some places, Ricardo distinguished between price, whether market or natural, and value.

Others have noticed:

"The Marxian reading of Ricardo has fared somewhat better. Marx claimed that Ricardo's treatment of value in the third edition of the Principles was marred by serious confusion: in some places Ricardo used 'value', 'absolute value' or 'real value' to denote 'necessary labour time'; but in others 'value' signified (relative) cost of production. Furthermore, it was Marx's judgement that Ricardo occasionally and falsely identified his 'value' concepts. However, in the opinion of later authorities, including Marshall, Stigler and Steedman, this reading is wholly untenable: Ricardo's 'value' concept was unambiguously one of cost of production.

It is certainly true, and acknowledged by all, that Ricardo had a 'value' concept in the sense of (relative) cost of production. But to claim that this was his only 'value' concept has been to perpetuate a one-sided distortion. Even before his embrace of the labour theory, Ricardo had used 'value' in a manner suggesting an 'absolute' entity associated with the facility or difficulty of producing an individual commodity. Once he made the labour theory his own, that association was with the quantity of labour expended in production, at various times denoted by such terms as 'natural value', 'real value', 'positive value' and even, at the expense of great confusion, 'value' itself. This 'labour quantity' species of 'value' both existed in Ricardo's schema and came to be invested with unique significance, especially in the later writings. Perhaps it is appropriate to remind ourselves that soon after the publication of the third edition of the Principles, on which Marx was commenting, Ricard had written to Trower: 'In speaking of exchange value you have not any idea of real value in your mind, I invariably have.' Much needlessly spilled ink might have been saved if Ricardo had made a similar announcement in his Principles.

To an extent, therefore, Marx's interpretation is superior to his critics: Ricardo sometimes did use 'value' in a manner associated with quantity of labour expenditure (as previous commentors, including Trower, the author of the Observations, Samuel Bailey and, in his Unsettled Questions, John Stuart Mill, had observed.)" (Terry Peach, Interpreting Ricardo, Cambridge University Press, 1993.)